Gold, 'Good' Volatility, & the Bitcoin Epoch
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Gold, 'Good' Volatility, & the Bitcoin Epoch
Gold hit another new all-time high of $2,748 last week, lifting the YTD gain to 32.5%. If gold were to finish the year here, it would be the best YTD gain since gold’s largest YTD gain in 1979 of 119.5%.
But it is not today’s absolute price gain for gold that gets our attention, rather it is the similarities in the price and volatility patterns that both gold and bitcoin share that we see as the key insight.
In the 1970s, gold’s volatility increased from 4% to over 80% as its price rose. This ‘good’ volatility (i.e. more upside ‘surprises’) occurred as gold entered a period of price discovery in a market unfamiliar with the yellow metal NOT being pegged to the US Dollar. This pattern of upside surprises as measured by ‘good’ volatility, is something we see today in bitcoin, as discussed in the ‘Wake Up Call’ series episode with Fidelity Digital Asset’s Director of Research, Chris Kuiper, and Onramp CIO, Jesse Myers. Excerpt here, full video here.
Gold has had four major rallies since Nixon broke the USD peg to gold in August 1971:
1970s: The first was the largest, when gold’s price rallied from $35 in 1970 to over $550 by the decade’s end, up over 1,400%.
2000s: Through the Global Financial Crisis from 2004 to 2011, gold gained over 350%.
2020-2022: Gold rallied over 60% as debt funded stimulus was unleashed globally in reaction to Covid.
2024: Gold is up over 32% YTD, perhaps on debt and deficit concerns as the Congressional Budget Office’s (CBO) U.S. deficit estimate for 2024 increased mid-year by 25%.
Below we share the price of gold, since, like bitcoin, gold’s price has been sensitive to increases in federal debt, deficits, and the global money supply.
source: Onramp, Koyfin
The Bitcoin Epoch
Gold has been getting headlines for good reason. As mentioned, its YTD price level is at a multi-decade high and it has been a proven store of value throughout time. But its ability to act as a medium of exchange and unit of account have faded as the economy has migrated to the internet.
The chart below shows how gold’s annualized returns have increased faster than the S&P 500’s, to where gold’s YTD gains now exceeds the S&P 500’s and the NASDAQ’s.
But bitcoin’s return dominates over all three time periods below. We believe this is because bitcoin is in a ‘price discovery’ phase. Like the period in the 1970s for gold after Nixon ‘suspended temporarily’ the conversion of dollars for gold, bitcoin is in a period of ‘price discovery’ that will likely result in continued higher volatility than established assets, but like gold, much of that volatility is ‘good’ or a result of upside surprises.
Where gold’s price discovery was due to the USD break from gold, bitcoin’s price discovery may be due to the increasing pace of debt and deficits that bring with it asset inflation and loss of buying power.
Of all the scars left on the fiscal body of the U.S. after the 2008 GFC, the level of debt is the most visible and lasting. The below graph shows annualized changes of the rolling 3-month levels of debt in the U.S. The spikes in 2008 and 2020 correspond to the jumps in the price of gold noted above. Today’s 10% annualized increase is modest by comparison. So why the recent jump in gold?
Fiscal dominance.
The combination of higher debt loads (US debt to GDP is 122%, the highest since WWII) and rising interest expense, has put the federal government in a bit of a pickle, layman’s speak for fiscal dominance. Essentially, the only way to keep up with mandatory spending is to increase the debt load.
Like gold in the 1970s, bitcoin’s volatility is in the mid, sometimes high double digits, and deemed TOO high by some investors, even though its compound annual growth rate is 60% over the past decade.
Gold has started to move, while bitcoin remains in a consolidation pattern (roughly flat over the past ~7 months), still below its March 2024 peak of $73,400, as per the Onramp Terminal.
But as Onramp CIO Jesse Myers pointed out last week, gold often leads bitcoin.
Charts Of The Week
“High-Yield Savings Accounts are misleading.” — River
Quote of the Week
“All roads lead to inflation…I’m long gold, I’m long bitcoin…I’d own zero fixed income…the playbook to get out of this is that you inflate your way out.”
Podcast
The New Frontier E006: The Intersection of Bitcoin and AI with Sagun Garg
In this episode, we sit down with Sagun Garg, a Bitcoin maximalist and expert in security protocols, to explore the future of Bitcoin custody and its intersection with AI technology. With over 10 years of experience in the Bitcoin space, Sagun offers deep insights into the evolving landscape of institutional adoption, particularly focusing on multi-signature and multi-institutional custody solutions. We dive into how Bitcoin can serve as a global monetary standard in a world driven by AI-induced deflation. Sagun shares his thoughts on the pivotal role Bitcoin will play in a hyper-deflationary environment, as well as the challenges and opportunities that lie ahead for institutional investors in securing their Bitcoin holdings. This episode provides a thought-provoking look at the future of Bitcoin, the technological advancements reshaping its custody solutions, and how AI is shaping the next wave of wealth management and economic measurement.
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